Why plastics signal problems ahead for the US shale gas bonanza

Shale gas developments in the US have sparked a wave of euphoria about the opportunity for a renaissance of its domestic manufacturing base. Petrochemicals should be one of the main beneficiaries, as the ethane produced from shale gas discoveries now provides the US with some of the cheapest feedstock in the world.

Major producers including Dow Chemicals, Shell and Chevron Phillips have already announced plans to build new ethane-based capacity. Others are likely to join them. Current estimates suggest total US ethylene capacity could therefore increase by 25 to 30 percent from today’s 27 million tonnes.

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However, one key factor has the potential to spoil the story – much of this new capacity will need to be exported in the form of polyethylene (PE) and other major plastics. Yet as the chart shows, based on data from Global Trade Information Services, US net PE exports have actually been declining since 2010, even though its cost advantage from shale gas was increasing.

This is quite a different picture from the 2006-09 period, when US exports rose from 700KT to 2.6 million tonnes (MT). China’s demand surged in 2009, due to its major stimulus programmes, enabling US exports to jump from 267KT to 900KT. But since then, US exports to China have dropped back to 2006’s level, and its total exports have fallen 39 percent to 1.6MT.

Analysis of recent market developments in China highlights the root cause of this dramatic shift. As the second chart shows, based on Q1 data for 2010-12:

China’s own demand has fallen 4 percent, as stimulus programmes have ended

Meanwhile, its own production has increased 7 percent

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This, of course, makes no sense in economic terms. China has some of the highest cost production in the world, being based largely on imported oil. But it values social stability above economics. So it is unlikely to shut plants and increase unemployment in order to access cheaper US imports. Instead, it is already planning further increases in its own capacity.

In addition, China is now taking a strategic view of its remaining import needs. Middle East imports were up 34 percent over the period, due to the ‘strategic corridor’ under which China provides access to markets in exchange for energy supplies. South East Asia imports were also up by 22 percent, due to the free trade agreement now in place. Imports from other regions thus suffered major falls. North East Asia imports were down 38 percent, with US imports down 62 percent and EU volumes down 68 percent.

Thus PE highlights the major challenge facing the USA as it seeks to use the shale gas bonanza to reinvigorate its manufacturing base. It has the feedstock, and the cost advantage. But it needs to increase its exports, if it is to move the additional volume.

The PE market however suggests that potential customers, such as China, are no longer playing by the old rules. Social and political factors are instead becoming increasingly important in dictating global trade patterns, at the expense of pure economics.